4 Microeconomics Committee Chair Pamela M Microeconomics Committee Chair Pamela M. Schmitt, United States Naval Academy Michael A. Brody, Menlo SchoolCommittee Members Luis F. Fernandez, Oberlin College Margaret Ray, Mary Washington College Dee Mecham, The Bishop’s School Sandra K. Wright, Adlai E. Stevenson High School College Board Advisor Mary Kohelis, Brooke High School Chief Reader David Anderson, Centre College ETS Assessment Specialists Fekru Debebe Hwanwei Zhao
11 Students Did Great On Firm and Market Graphs in Perfect Competition Pmarket = PfirmInterpreting shifts in S and DHorizontal Demand Curve for FirmProfit Max Quantity where MR = MCLink between MFC and Q of Labor Hired
13 Overview of Trouble Spots 11. Finding the Socially Optimal Quantity10. Deadweight Loss from a Positive Externality9. Allocative Efficiency7. Price Elasticity of Demand6. MFC and MRP in a Perfectly Competitive Labor Market5. Effect of Price Ceiling on DWL4. MR with a Price Ceiling3. MFC with a Minimum Wage2. Effect of Lump Sum Tax on DWL1. Deadweight Loss from a Negative ExternalitySpecial Mention: Axis Labels!
14 11. Overseas Micro 2 (a)(ii) Question: Suppose research shows that the more college education individuals receive, the more responsible citizens they become and the less likely they are to commit crimes.Draw a correctly labeled graph for the education market and show …(ii) The socially optimal quantity of education, labeled QS.
15 Socially Optimal Quantity PRICESupply = Marginal Social CostPMMarginal Social BenefitDemand = Marg. Private Ben.QMQSQuantity of Educations36% answered correctlySocially Optimal Quantity
16 10. Overseas Micro 2 (a)(iii) Question: Suppose research shows that the more college education individuals receive, the more responsible citizens they become and the less likely they are to commit crimes.Draw a correctly labeled graph for the education market and show …(iii) Deadweight loss at the market equilibrium, completely shaded.
17 Deadweight loss from underproduction PRICEDeadweight loss from underproductionSupply = Marginal Social CostPMMarginal Social BenefitDemand = Marg. Private Ben.QMQSQuantity of Educations33%answered correctly
18 9. Micro 1 (c)Question: Assume that the monopolist is maximizing profit. Is allocative efficiency achieved? Explain.Explain point for wrong current account change was accepted because the order of these two parts of the question was not important.
20 (33% answered correctly) 9. Micro 1 (c)Answer: No, because P ≠ MC / D ≠ MC / MSB ≠ MSC.(33% answered correctly)
21 8. Micro 1 (g)Question: Assume instead that the monopolist practices perfect price discrimination (also called first-degree price discrimination).(ii) What will be the value of the consumer surplus?
26 7. Micro 1 (d)Answer: Demand is inelastic because TR increases as price increases / MR is negative / the price elasticity is .74 < 1.27% answered correctly
27 6. Micro 2 part (c)Question: Assume that avocado producers hire workers from a perfectly competitive labor market. Draw a graph of labor supply and demand for the typical firm and label the supply curve MFC and the demand curve MRP.
28 Micro 2 (c) Answer 25.3% answered correctly Wage W MFC MRP QL QLQuantity of Labor25.3% answered correctly
29 5. Overseas Micro 2 part (b) Question: Assume that the government imposes an effective (binding) price ceiling on the price of college education.(ii) Does this price ceiling increase, decrease, or have no impact on the deadweight loss in this industry? Explain.
30 Deadweight loss from underproduction PRICEDeadweight loss from underproductionSupply = Marginal Social CostPMMarginal Social BenefitDemand = Marg. Private Ben.QMQSQuantity of Educations
31 PRICESupply = Marginal Social CostP1PMPCeilingMarginal Social BenefitDemand = Marg. Private Ben.QCQMQSQuantity of Educations
32 5. Overseas Micro 2 part (b) Answer: Deadweight loss will increase because the quantity supplied will decrease.(13 percent answered correctly)
33 4. Micro 1 (f)Question:Assume that regulators impose a price ceiling of $22. What is the marginal revenue of the eighth unit?
37 3. Overseas Micro 3 (c)(ii) Question: Identify the quantity of labor hired [by a monopsony when] the government imposes a minimum wage of $ Explain.
38 WageMarginal Factor CostSupply of Labor12.5Marginal Revenue Product10100150Quantity of Labor
39 WageMarginal Factor CostSupply of Labor12.5Marginal Revenue Product10100150Quantity of Labor
40 3. Overseas Micro 3 (c)(ii) Answer: 150 units.(37% answered correctly)Explanation: Because the marginal factor cost curve becomes horizontal at the minimum wage up to a quantity of 150.(8% answered correctly)
41 2. Micro 3 (b)Question: Assume a lump-sum tax is imposed on the [perfectly competitive] producers of good X [known to create a negative externality]. What happens to the deadweight loss? Explain.
42 (6% answered correctly) 2. Micro 3 (b)Answer: There is no change because a lump sum tax does not affect marginal cost, so the quantity supplied remains the same.A discussion of firms exiting due to the lump sum tax and the resulting change in DWL is also acceptable.(6% answered correctly)C is below PPC because output level was less than full employment output. D must be at a point with more military goods than at C.
43 1. Micro 3 (a)Question: Draw a correctly labeled graph of the market for good X [known to create a negative externality] and show …(iv) The area of deadweight loss, shaded completely
44 Deadweight loss from over production Answer:Marginal Social CostPRICEDeadweight loss from over productionMarginal Private CostDemand = MSBQSQMQUANTITY4.1% answered correctlyMarket Quantity
45 Deadweight Loss with Negative Externalities “Quantity levels less than or greater than the efficient quantity create efficiency losses (or deadweight losses).”--McConnell, Brue, Flynn, 18e, p. 129Diagrams similar to the previous slide:McConnell, Brue, Flynn, 19e, pp. 99 and 105Parkin 5e, p. 117This issue is discussed further in the Deadweight Loss Presentation.
46 Labels (many of which are wrong)– use what’s in the text Pesos per DollarPrice in pesosPeso PQ pesosP$$/PesoPrice of $PLV$FX/$Value of $Value of PesoPesoE.V. of PesoPeso per $Peso in dollarsP = Peso$ vs. Pesos$ in terms of pesoPrice of $ / PesoPeso value of $Peso in relation to $Peso price for $EExchange rateBe as clear as possible